I am 32 years old. My salary is Rs 62,400/month. My investments are Rs 37,000/month in UTI Nifty Index Fund, Rs 4,000/month in the Employee Provident Fund (EPF), Rs 500/annum in the Public Provident Fund (PPF), and Rs 97,000/year in Mirae Asset ELSS.
Current value of portfolio is Rs 16.8 lakh (equity) and Rs 4.8 lakh (debt).
How can I achieve my goals? Retirement in 2048; Child's higher education in 2037.
While I recommend that you consult a financial adviser, here are some broad guidelines.
The main theme that you need to focus on is an asset-allocation-based approach (mix of equity and debt) for investing towards your goals. While fixed-income lends stability to the portfolio, equities play a crucial role in wealth generation over the long run with a potential to deliver superior inflation-adjusted returns compared to fixed-income. Do read, Do you need debt in your portfolio, or will just equity do?
Given your stated goals and the long investment horizon, here is our view.
Your current allocation is almost 90% into domestic equities, with the predominant allocation to an index fund. Although, most active funds have underperformed their benchmarks particularly in recent times, the potential for outperformance still exists in segments such as the mid-cap and small-cap segments. It is advisable to invest with a mix of active and passive funds, and have some allocation to mid and small-cap segment too. Also, one should have some exposure to fixed-income which can be accessed during times of need, as EPF corpus withdrawals are subject to various restrictions.
You may invest with a portfolio mix of about 80% into equities:
- Large-cap funds: 50%
- Mid-cap funds: 10%
- Small-cap funds: 5%
- Global funds: 15%
International equites offer diversification benefits providing exposure to diverse economic growth drivers, and also act as a hedge against rupee depreciation. Do read, Why it is time to revisit your home bias.
For the balance 20% investment in fixed income, you can consider fixed income funds with a high (safer) credit quality portfolio such as Banking & PSU debt funds, Corporate Bond funds, Short duration funds and Medium to long term funds.
You may also allocate about 5-10% of your allocation (replacing some of the equity allocation suggested above) to gold as part of your strategic asset allocation. Gold offers a hedge against inflation and a safe-haven asset in times of market drawdowns.
Valuations play a crucial role while entering any asset class /security. Lower (cheaper) valuations reduce the risk of high future capital loss and improve upside potential, and vice-versa. Given valuations are currently high relative to the past, it is advisable to invest in a staggered manner via the SIP route. Do read, Why SIP is a psychological hack.
It is recommended that you have an emergency corpus in place worth at least 6 months of expenses, and a term plan and a health cover in place to safeguard your family against any untoward incident. Do read, 4 things an Emergency Fund is not.
Your goals
Investing as per the recommended asset-allocation (including current corpus), you may be able to achieve your goals of your child’s higher education in 2037 (assuming present value at Rs 20 lakh and inflation for education expenses at 8%), and accumulate a wealth of about Rs 7 crore at retirement.
The corpus amount has been computed assuming equity market returns of 10.5% per annum and fixed income returns of 6% per annum. To accumulate a higher corpus, it is advisable to increase your investment in line with increase in income, and also top up your investments whenever you have any excess savings or any windfall gains.
Stick to your strategic asset-allocation and avoid timing the market. Any material over-weight exposure can be re-balanced back to the original target weights. Periodically evaluate the performance of the funds in your portfolio vis-à-vis that of their respective category peers. If a fund has been delivering below-average performance consistently, you may switch to a more consistent one.
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